Let Greece go

I love the photos of German Chancellor Angela Merkel and French President Nicolas Sarkozy together. The Frenchman, especially, is always pointing at something. What? I just imagine Merkel saying something like, “If you don’t put that finger down, I’ll send in the panzers!” Humor aside, the pair are fighting to get Greek Prime Minister George Papandreou’s mind right, after he scuttled the latest bailout by calling for a national vote on the matter. Although he’s walking back today, the situation remains chaotic.

My advice: Let Greece default and exit the eurozone.

The effort to save Greece as a member of the 17-country common currency area has been halting and too small. It’s never been about just saving Greece, but rather the big European banks that foolishly made loans to a country with a weak economy, too many people in public jobs and an inadequate tax-collection process. Then, as usual, they sliced and diced the loans into exotic swindles that are now loose in the financial system.

The New York Times offered a great graphic showing the interconnectedness of the crisis, which now extends far beyond Greece. But, as MIT economist Simon Johnson writes, things are made worse due to lack of complete information on all the bets. “For example, what is the exposure of US financial institutions to European debt, directly or indirectly, through derivatives transactions of any kind? The opaqueness of derivative markets means that most investors can only guess at what could happen. Most of the relevant regulators and supervisors with whom I have talked seem also to be largely in the dark – remember the experience of AIG in 2008.”

The contagion is now threatening Italy, the third-largest economy in Europe, as well as Spain. That’s where Sarkozy and Merkel need to be pointing. As for Greece, default will bring great pain, a la the Latin American experiences in the 1980s and 1990s. But it’s better than bringing down a continent and sending the U.S. into a new financial crisis.

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